Adjusted trial balance: Definition, preparation and example

TransferWise
01.30.20
5 minute read

What is an adjusted trial balance?

An adjusted trial balance represents a listing of all the account balances after posting of all the necessary adjusting entries in ledger accounts.¹ The purpose of preparing an adjusted trial balance is to correct any errors and to make the entity’s financial statements compatible with the requirements of an applicable accounting framework such as international financial reporting standards (IFRS).

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How to prepare an adjusted trial balance

An adjusted trial balance is prepared using the same format as that of an unadjusted trial balance.

  • Preparation of an adjusted trial balance starts with a heading consisting of three lines. First line indicates the name of the company, second line states the name of the trial balance and third line states the date of the reporting period for which the trial balance is prepared. ² (example below)
ABC Company
Unadjusted Trial Balance
For the year ended December 31, 2019
  • Three columns are used with first column showing names of account balances, while second and third column showing debit and credit balances respectively. (example below)
Account Debits Credits
Property,plant & equipment 152,000
Furniture & Fixtures 114,000
Inventory 6,400
  • Account balances are listed in the adjusted trial balance using either their respective account numbers given to them in a chart of accounts or using the balance sheet order by starting with assets, liabilities and equity first and then entering the income and expense accounts.

  • Since journal entries are made using double entry bookkeeping process, thus totals of the debit and credit columns must match with each other. If the totals of the two columns do not match with each other it means that there is some error in making of journal entries or their posting in to general ledger.

  • Adjusting entries are made at the end of an accounting period to adjust ledger accounts so that they comply with rules of accrual accounting. Main purpose of adjusting entries is to match incomes and expenses to appropriate accounting periods.

  • There are five types of adjusting entries that are required to be made at the end of the accounting period. Accrued revenues, accrued expenses, deferred revenues, deferred expenses and depreciation expense require adjusting entries so as to accurately reflect the accrual method of accounting.³

  • There are two methods of preparing an adjusted trial balance.⁴

  • First, you can post the adjusting entries into the ledger account and adjust the ledger balances accordingly. Once posting is complete, you can

  • take the adjusted balances and list them on a trial balance. This method is similar to preparing an unadjusted trial balance as you are simply taking the account balances from ledger accounts and are listing them in a trial balance.

  • Secondly, you can use the unadjusted trial balance and can only add the adjusting entries to the accounts that are affected by the adjustments. This method is simple and easy to implement, however, only small businesses with few adjusting entries can use this method.

Example of an adjusted trial balance

These examples will show you how to adjust an unadjusted trial balance looks like.

ABC Company
Unadjusted Trial Balance
For the year ended December 31, 2019
Account Debits Credits
Property,plant & equipment 152,000
Furniture & Fixtures 114,000
Inventory 6,400
Accounts receivables 12,200
Cash 18,000
Long term Loan 74,000
Accounts Payable 6,400
Share capital 100,000
Retained earnings 88,000
Sales Revenue 114,600
Salaries expense 52,000
Marketing expenses 14,000
Interest expense 8,000
TOTAL 383,000 383,000

ABC Company has $12,000 in salaries that were unpaid as of the end of December, as well as $8,000 of earned but unbilled sales. We will use the unadjusted trial balance of ABC Company and will pass the necessary adjusting entries in the trial balance and will prepare an adjusted trial balance.⁶

Adjustments from unadjusted trial balance

Account Debit Credit
Property, plant & equipment
Furniture & Fixtures
Inventory
Accounts receivables 8000
Cash
Long term Loan
Accrued Liabilities 12000
Accounts Payable
Share capital
Retained earnings
Sales Revenue 8000
Salaries expense 12000
Marketing expenses
Interest expense
TOTAL 20000 20000

Adjusted trial balance

Account Debit Credit
Property, plant & equipment 152000
Furniture & Fixtures 114000
Inventory 6400
Accounts receivables 20200
Cash 24400
Long term Loan 74000
Accrued Liabilities 12000
Accounts Payable 6400
Share capital 100000
Retained earnings 88000
Sales Revenue 122600
Salaries expense 64000
Marketing expenses 14000
Interest expense 8000
TOTAL 403000 403000

With an adjusted trial balance, necessary adjusting journal entries are incorporated in the trial balance. In the above example, unrecorded liability related to unpaid salaries and unrecorded revenue amount has been included in the adjusted trial balance. This trial balance is then used to prepare financial statements.

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Sources:

  1. Accounting tools blog post
  2. My accounting course blog post
  3. Online accounting course
  4. Wall street mojo blog post
  5. Accounting tools blog post
  6. Accounting tools blog post

This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date.

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